Brazilian Overview Monthly Report - MAY 2020

May/20

BRAZILIAN ECONOMY...........................................................................2 IMPORTANT DATA....................................................................................3 LATIN AMERICA MACRO DATA.................................................................3 CONFIDENCE INDEXES.............................................................................4

TRAVEL AND TOURISM PULSO TURISMO AND COVID-19 - SECOND EDITION.........................4 MAIN HIGHLIGHTS................................................................................5 MOST PEOPLE CHOSE TO DELAY TRIPS...................................................5 KEEPING AN EYE ON BRANDS..................................................................5 NEXT TRIPS.............................................................................................5 BUDGET...................................................................................................5 PROTOCOLS............................................................................................5 FEAR.......................................................................................................5 COMPANIES............................................................................................5 FLEXIBLE COMMERCIAL POLICY..............................................................5 REGIONAL LEISURE..................................................................................6 ABOUT THE RESPONDENTS......................................................................6

PERSPECTIVES FOR JUNE AND JULY...................................................6

MAIN FACTS While in China, the first epicenter of the coronavirus pandemic, the economy is reopening, and countries in Europe are already planning to resume activities, in Brazil this is the most critical moment. A few cities are under lockdown and most of the other cities follow the maintenance of quarantine and social distancing, due to the growing number of deaths from COVID-19. According to the Ministry of Health, May and June tend to be the peak period of the virus in Brazil.

As a result, expectations for the economy are deteriorating. Gross domestic product is expected to decline by 7% this year, which means that the same amount of wealth the Brazilian economy recently lost during the 2015 and 2016 crisis will be lost in one year. In addition, there is an expenditure limitation in the fiscal sector for the government to combat the pandemic in a broader manner, because, in the last five years, the primary deficit (expenses higher than revenues) was close to R$ 700 billion (US$ 120 billion).

Therefore, families and governments entered this crisis in a very delicate and challenging financial situation. Even so, the federal government continues trying to minimize the impacts of the pandemic on the economy: emergency aid of R$ 600 (about US$ 100) for the most vulnerable citizens; financial aid of R$ 125 billion (US$ 22 billion) to states and municipalities, besides modifying the Provisional Measures, which aim to find a balance through the law, in this moment of public calamity, in relations such as employee and employer, company and consumer, among others, so that the rights of workers and consumers are guaranteed, and the liquidity of companies is preserved.

With respect to the Central Bank of Brazil, the basic interest rate decreased again at the beginning of the month, from 3.75% to 3% per year, a new record low. This is not different from what most countries are doing. However, this level does not compensate the return due to the risk of the Brazilian economy, which will increase from 80% to 90% in the Debt x GDP ratio this year. As a result, the Brazilian currency continues to devalue, approaching R$ 6 per dollar. Therefore, the internal, economic and political risk is added to the search for foreign investors investing in dollar as a form of protection.

Under normal conditions, such significant exchange rate devaluation, close to 50% since the beginning of the year, would have very serious consequences on inflation. However, the crisis weakened the demand and the official price index presented, for example, a 0.31% retraction in April. The effects can be seen in specific situations, as is the case with wheat, which is mostly imported from Argentina. In April, the inflation for the Flour and Pasta item, for example, was 1.39%, against 0.70% in the previous month.

Brazilian families are restricting spending on basic products, food and medicines. For this year, Fecomercio projects a drop of 11% in national retail, or R$ 83 billion (about US$ 14 billion) of loss for companies in the sector. And even though the basic interest rate is 3% per year, the market average for consumers is 41.6% per year, according to the Central Bank. In addition, due to the high default risk, banks are selecting more the credit, which makes it even more difficult for families to protect themselves throughout the crisis.

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The situation is similar for companies. Credit has dried up. The lack of guarantees is the main limitation for companies to obtain loans, at this moment, for working capital, and to be able to pay employees, rent, suppliers, etc. Although the government and the Central Bank are making a lot of effort to provide more liquidity to companies by providing credit, the result has been very small. This will result in the bankruptcy of many companies, especially micro and small ones.

Therefore, in addition to the challenge of facing the coronavirus at its worst moment in Brazil, the government will have to present an even more substantial plan for the subsequent period to bring back confidence so that family and companies are able to resume consumption and investment.

IMPORTANT DATA: April inflation was negative, -0.31%, the lowest variation for the month since 1994, according to the IBGE. The groups that most influenced the decrease were Transport (-2.66%), related to the decrease in fuel prices (-9.59%), and Household Items (-1.37%). On the other hand, the Food and Beverage group registered an increase of 1.79%, after an increase of 1.13% in the previous month. In the 12-month period, general inflation is 2.40%. n

In the first quarter, the unemployment rate in Brazil reached 12.2%, which represents 12.9 million people. This is a growing trend as a result of the crisis, however, not in an expressive way because people are not looking for a job right now. n

The industry suffered a great loss of 9.1% in March, compared to February, the biggest drop since 2002. In the annual comparison, the retraction was 3.8%. All segments analyzed by the IBGE suffered a setback. It is worth remembering that in most part of March there was no quarantine decree. In other words, the numbers in the coming months tend to present even more pronounced decreases.

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Despite representing about 5% of physical retail sales, e-commerce has been highlighted in this epidemic period. According to Webshoppers, sales grew 48% from the second half of March to the end of April.

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Latin America Macro Data

Argentina

Brazil

Chile

Colombia

Mexico

Peru

Unemployment rate

8,90%

12,20%

8,20%

12,60%

3,30%

7,80%

Basic interest rate

38,00%

3,00%

0,50%

3,25%

6,00%

0,25%

Inflation (LTM - apr*)

48,40%

2,40%

3,74%

3,51%

3,25%

1,71%

*LTM - Last Twelve Months Until April (except Argentina) Legend: Green, Red and Black The data get better, worse and equal than the previous month.

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CONFIDENCE INDEXES: The Consumer Confidence Index (ICC) of the city of São Paulo registered a strong retraction of 10.1%, going from 124.6 points in March to 112 in April. The greatest negative influence was the index that assesses the current situation of the economy, which showed a monthly decrease of 12.1% and returned to the level of pessimism with 95.7 points. In the annual counterpoint of the general index, the decrease was 8%.

The Retail Businessmen Confidence Index (ICEC) of the city of São Paulo started its cycle of decline in April, presenting -5.1% compared to March, reaching 118.7 points. In relation to April 2019, the retraction was 4.1%. All three subindexes analyzed by ICEC were negative in the month, with emphasis on the one that assess the current conditions of the economy and the company itself. This subindex decreased 7.4%.

Consumer Confident Index (ICC) and Comerce Businessman (ICEC)

Note: The ICC and ICEC range from 0 to 200 points. The level from 100 to 200 points is considered optimistic and below 100 points, pessimistic.

Although the indicators are from the city of São Paulo, they follow the trend of what is happening in the rest of the country since the largest city in Brazil represents 11% of the national GDP.

TRAVEL AND TOURISM PULSO TURISMO AND COVID-19 - SECOND EDITION TRVL LAB, a partnership between PANROTAS and MAPIE consultancy, launched on May 25 the second edition of PULSO TURISMO AND COVID-19, research and analysis aimed at measuring the impact of the pandemic in the Travel sector and pointing out ways and directions for professionals and companies in that industry. Both the first edition, launched in early April, and this second study can be downloaded for free at www.trvl.com.br (in Portuguese).

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MAIN HIGHLIGHTS MOST PEOPLE CHOSE TO DELAY TRIPS: 55.52% of respondents say they had planned and/ or purchased trips that were impacted by the new coronavirus pandemic. In this second edition, more action on the part of travelers can be noticed. At this time, 34.27% are still waiting to understand the next steps (previously it was 45.45%), and 47.19% continues to prefer changing the trip to a future date.

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KEEPING AN EYE ON BRANDS: Travel consumers continue to keep an eye on the positioning of brands and companies they follow. The percentage of consumers saying they will stop buying from brands that do not treat their employees/customers adequately during the pandemic and at this moment, when the contamination curve is rising, increased from 51.03% to 55.17%, and 54,86% consumers consider brands that encourage their customers to stay at home to be responsible. n

NEXT TRIPS: The intention to travel decreased from the first to the second edition, which can be considered consistent with the moment, since the pandemic curve continues to grow in Brazil. In addition, confidence in tourism service providers has dropped considerably. Only 12.26% (previously it was 22.68%) say they have total confidence in service providers.

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BUDGET: For most respondents, the travel budget was reduced in 2020. For 28.98%, it remains the same, and for 19.75%, it ceased to exist. There was no significant variation when comparing these percentages to the first edition. n

PROTOCOLS: In general, it is noticed that customers are not only aware of new hygienic and sanitary practices and needs, but also want such conducts to feel safe. Masks can already be considered mandatory items in everyday life and also when traveling. 76.70% consider it essential to use masks in public/public areas to feel safe. n

FEAR: Fear is a relevant factor in the decision to travel. 61.39% say they are afraid to travel and expose the family to the disease. n

COMPANIES: The expectation for the resumption [of work] is more pessimistic. If at the beginning of the crisis most companies believed that it would happen in the months of May and June, now it is believed that it will happen in August or just at the end of the year. According to most companies, the return to ‘normal’ will only happen in 2021, with close percentages divided between the first and second semesters. n

FLEXIBLE COMMERCIAL POLICY: For 80.16% of the companies, it is essential that there is flexibility in commercial policy, facilitating changes and cancellations and adjusting payment methods. 78.05% consider it important to have a health seal or sanitary certificate for airlines, lodging facilities and others to convey confidence to customers.

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REGIONAL LEISURE: 43.21% fully agree that leisure tourism will be primarily regional and road-based in the coming months. The MICE segment will have to wait a little longer. For 41.73% of respondents, this segment will gradually return from 2021 onwards. 34.06% believe that corporate tourism will return little by little, as from the quarantine flexibilization. International destinations that have grown in popularity: South America and Florida, but the intention of international travel is long term. n

ABOUT THE RESPONDENTS: 416 travelers and 372 Tourism companies; 63.23% of travelers are in the Southeastern Brazil; 54% are men; 48% have an individual monthly income between R$ 3,000 and R$ 8,000 (US$ 500 and US$ 1,300); and 80% are travel distributors (companies).

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See the complete survey at www.trvl.com.br

PERSPECTIVES FOR JUNE AND JULY Hotels are expected to start reopening in these months and the occupancy of those that are already open shall increase weekly, especially in the South and Central-West regions. The Southeast region continues to lead the number of reservations, with around 45%.

Azul, Gol and Latam airlines will increase their domestic network in June, but it still represents about 10% of pre-crisis flights. Latam Airlines announced the return of flights to Miami, Frankfurt, Madrid, London and Santiago, departing from São Paulo. Companies like Lufthansa and Air France will increase their frequencies to Brazil in early June.

Brazil extended until June 22 the ban on foreigners entering the country. Argentina closed its air borders until September. And the United States imposed a travel ban on people coming from Brazil until the level of infections and deaths decreases.

The prospects for the events to return is from August, reaching normality, with the new protocols, in October.

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